What The CARES Act of 2020 Means
Who would have thought in February of 2020 that the market could crater in two short months for a non financial reason?
It turned out the longest viral outbreak was stronger than the longest-running bull market in U.S. history. We went from wow to how in less than 30 days. From the peak in mid-February, stocks sank into a 30% decline, a greater fall than the early days of the Great Depression. Panic has surely set it in as well, and our only hope is that reason and rationality will triumph. Black swan events, which we define as the highly unexpected and unwelcome, have been here before and we have prevailed.
The Visual Capitalist has created a chart of Black Swans for your review.
As you can see, nothing is simple. We drift every five to ten years or so into swoons that knock off from 20% to nearly 60% from the global economy. There are pint sized hits like the Brexit vote and meteors like the ’08 Global Financial Crisis. The thoughtful analyst can only conclude that we should take time to learn how to deal with crisis and panics rather than spend all our energies on avoiding them. If that is what we have been doing, we have failed miserably.
There is some good news. Based on the length of previous crises, duration has lasted as little as eight days and as long as one thousand. The problem is that financial crises tend to be the longer lasting kind. If we try to extrapolate from previous crises as a wager on the 2020 pandemic, a health crisis thaty turns into a financial crisis, we could be looking at a mixed melody. It suggests this crisis will last somewehere between SARS 40 days and the global crisis 1,022 days. Call it a rough estimate of six months in duration, or as long as nine to twelve.
Every black swan impacts our lives and our markets differently. When the bottoms are deep, the recovery is greater. Most are short-lived and very few last more than a year. When the Federal Reserve and Congress jumped in recently, they shortened the life of shis virus/panic, however long it will last.A the moment, we only have past data to look at, and it suggests the pandemic may be short-lived. We can only hope. Let’s take a look at the funding side.
The CARES Act of 2020
The Coronavirus Aid, Relief, and Economic Security Act — also known as the CARES Act — was passed by U.S. lawmakers in late March 2020. The size of the government’s largesse made it the largest economic stimulus bill in modern history. The math suggests it will be twice as generous as the financial crisis stimulus act of 2009.¹
¹ https://www.visualcapitalist.com/the-anatomy-of-the-2-trillion-covid-19-stimulus-bill/
The CARES Act is divided into five buckets:
Individuals: $603.7 billion — 30% of CARES Act
- The U.S. government will deploy “helicopter money” — direct cash payments to individuals and families.²
² Who would have thought in February of 2020 that the market could crater in two short months for a nonfinancial reason? It turned out the longest viral outbreak was stronger than the longest-running bull market in U.S. history. We went from wow to how in less than 30 days.
From the peak in mid-February, stocks sank into a 30% decline, a greater fall than the early days of the Great Depression. Panic has surely set it in as well, and our only hope is that reason and rationality will triumph. Black swan events, which we define as the highly unexpected and unwelcome, have been here before and we have prevailed.
The Visual Capitalist has created a chart of Black Swans for your review.
As you can see, nothing is simple. We drift every five to ten years or so into swoons that knock off from 20% to nearly 60% from the global economy. There are pint-sized hits like the Brexit vote and meteors like the ’08 Global Financial Crisis. The thoughtful analyst can only conclude that we should take time to learn how to deal with crisis and panic rather than spend all our energies on avoiding them. If that is what we have been doing, we have failed miserably.
There is some good news. Based on the length of previous crises, duration has lasted as little as eight days and as long as one thousand. The problem is that financial crises tend to be longer-lasting. If we try to extrapolate from previous crises as a wager on the 2020 pandemic, a health crisis that turns into a financial crisis, we could be looking at a mixed melody. It suggests this crisis will last somewhere between SARS 40 days and the global crisis 1,022 days. Call it a rough estimate of six months in duration, or as long as nine to twelve.
Every black swan impacts our lives and our markets differently. When the bottoms are deep, the recovery is greater. Most are short-lived and very few last more than a year. When the Federal Reserve and Congress jumped in recently, they shortened the life of this virus/panic, however long it will last. A the moment, we only have past data to look at, and it suggests the pandemic may be short-lived. We can only hope. Let’s take a look at the funding side.
The CARES Act of 2020
The Coronavirus Aid, Relief, and Economic Security Act — also known as the CARES Act — was passed by U.S. lawmakers in late March 2020. The size of the government’s largesse made it the largest economic stimulus bill in modern history. The math suggests it will be twice as generous as the financial crisis stimulus act of 2009.¹ (for charts, explanations, and data below)
¹ https://www.visualcapitalist.com/the-anatomy-of-the-2-trillion-covid-19-stimulus-bill/
The CARES Act is divided into five buckets:
Individuals: $603.7 billion — 30% of CARES Act
- The U.S. government will deploy “helicopter money” — direct cash payments to individuals and families.
- The centerpiece of this plan is a $1,200 direct payment for those earning up to $75,000 per year. For higher earners, payment amounts will phase out, ending altogether at the $99,000 income level. Families will also receive $500 per child.
There are three other key things to know about this portion of the stimulus funds:
- There will be a temporary suspension for any student loan held by the federal government. This means no payments required and no interest accrued until the end of September 2020.
- Borrowers with federally backed loans can request a forbearance on mortgage payments for up to six months.
- There will be an expansion of unemployment benefits, including a four-month enhancement of benefits. This plan includes freelancers, workers in the gig economy, and furloughed employees.
Big Business: $500.0 billion — 25% of total CARES Act
- This component of the package is aimed at stabilizing big businesses in hard-hit sectors.
- About $58 billion has been earmarked for commercial and cargo airlines, as well as airline contractors.
- Companies receiving stimulus money will be barred from engaging in stock buybacks for the term of the loan plus one year.
- $17 billion allocated to “maintaining national security”. While this provision doesn’t mention any specific company by name, the primary recipient is believed to be Boeing.
- The bill also indicates an inspector general will oversee the recovery process.
Small Business: $377.0 billion — 19% of total CARES Act
- The Small Business Administration (SBA) will be given $350 billion to provide loans of up to $10 million to qualifying organizations.
- These funds can be used for mission-critical activities, such as paying rent or keeping employees on the payroll during COVID-19 closures.
- The bill sets aside $10 billion in grants for small businesses that need help covering short-term operating costs.
State and Local Governments: $340.0 billion — 17% of total CARES Act
- The biggest portion of funds going to local and state governments is the $274 billion allocated towards direct COVID-19 response. The rest of the funds in this component will go to schools and child care services.
Public and Health Services: $179.5 billion — 9% of total CARES Act
- The biggest slice of this pie goes to healthcare providers, who will receive $100 billion in grants to help fight COVID-19.
- There will also be a 20% increase in Medicare payments for treating patients with the virus.
- Money is also set aside for initiatives such as increasing the availability of ventilators and masks for the Strategic National Stockpile, as well as providing additional funding for the Center for Disease Control and expanding the reach of virtual doctors.
- Finally, beyond the healthcare-related funding, the CARES Act also addresses food security programs and a long list of educational and arts initiatives.
